Thank You

Error.

With both the Dow and Standard and Poor's 500 indexes hitting all-time highs once again Monday, the market's growing confidence continues to be a front-burner issue.

A measure of market fear, the CBOE Volatility Index, or VIX, closed at 11.15, near its low for this year and close to its all-time low of 9.3 reached in 1993. Contrast that with the fact that the VIX reached more than 80 during the financial crisis and you'll see how different investor moods are these days.

As Mohamed El-Erian, the chief economic adviser at Allianz, the German financial-services giant, writes in his Bloomberg View column: "Some see the fall in the VIX as a comforting trend that enables greater risk taking. This group believes that it's a good unbiased indicator of what lies ahead: The lower it goes, the stronger the case for taking on more investment exposure, even at elevated prices."

No doubt, advocates of that position have made out well in recent months. With the exception of a spike in the VIX in February, the so-called fear gauge has remained low while stocks have continued to inch up.

But El-Erian, who left a job as chief investment officer of Pimco earlier this year, doesn't appear to take much comfort in a low VIX.

Bloomberg View

"The VIX tells us more about past and current conditions than about future ones," he writes. "Its fall is now more a reflection of Fed policy than of self-reinforcing market forces. At its current low levels, the VIX suggests investors may be overly impressed by the longer-term power of the Fed to maintain stability, and may be excessively downplaying fluid fundamentals."

Given that investors, even in their collective wisdom, can never really predict the future, El-Erian can't be wrong in his belief that the current complacency is a reflection of what has already come, not what will be.

And he's probably right when he suggests that much of that optimism or complacency is built on a belief that the Fed has it all figured out when it comes to maintaining economic growth and stock-market returns. But at some point, those "fluid fundamentals" will turn against the stock market.

While top-down investors look at indicators such as the VIX in trying to divine the mood of investors, they also look at other indicators of sentiment such as the percentage of investable assets that investors have in cash, versus bonds and stocks.

Contrarians, for example, argue that a spike in cash holdings is a positive for markets, since there's a ready source of fuel to put in the stock market. By contrast, little cash on the sidelines is a negative for stocks going forward.

But there's a running debate regarding just how much cash investors have in their portfolios.

For example, a recent column in the New York Times, refers to a recent study by State Street's Center for Applied Research. The study indicates that in the U.S., cash allocations rose from 26% in 2012 to 36% in 2014.

The New York Times

"Despite the run-up in equity markets, people have resisted rushing into stocks and have instead added to cash," writes Paul Sullivan. " They've done this regardless of their age or amount of wealth."

Sullivan's article goes on to state the primary reason for this trend is fear tied to fresh memories of the last financial crisis when stocks fell heavily.

But given that the VIX, a measure of market fear, is so low, how fearful can investors really be about stocks?

Besides, there are Investment Company Institute statistics that suggest investors have, to the contrary, been using cash to buy long-term bonds and stocks in recent years.

"Money market assets [a cash proxy] as a percentage of all mutual fund assets are at the lowest level going back to the mid 1990s," writes the blog of Horan Capital Advisors. "Additionally, Forbes cites the AAII April Asset Allocation Survey noting cash allocations reported by investors stand at 17.4% which is below the long- term average of 24%."

Sounds like talk that investors are still clinging heavily to cash in the midst of a robust bull market doesn't square with the facts.